In the Midwest, the drought is doing a number on the nation's biggest agricultural crop, corn. The USDA says half of the country's cornfields are in poor or very poor condition, and the short supply is driving up the price. Now, a fight between livestock farmers and ethanol producers over the high priced corn crop. Farmers say ethanol factories have an unfair advantage.

NPR's Dan Charles reports.

DAN CHARLES, BYLINE: Mark Legan has 3,000 sows on his farm near Coatesville, Indiana. And those pigs eat a lot of corn.

MARK LEGAN: We've got some sows that are eating over than 30 pounds of feed a day, in order to make enough milk to wean the average of 11 pigs per litter.

CHARLES: Feed is Mark Legan's biggest expense. Half of that feed is corn and because of the drought the corn supply is shrinking. There's a bidding war for it and the price is soaring. Legan is bidding for that corn against a factory 15 miles away with an even bigger appetite for this crop.

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CHARLES: Ninety big trucks drive into the ethanol plant in the town of Cloverdale, Indiana. Each one dumps 50,000 pounds of corn. The factory concerts that corn into ethanol which gets blended into gasoline. When corn is cheap, ethanol is too, and gas companies are happy to buy it. Last year 40 percent of America's corn harvest went to ethanol factories.

But economist Wallace Tyner at Purdue University says when corn is scarce and ethanol is expensive, as they are right now, gas companies don't have any economic incentive to buy that ethanol.

WALLACE TYNER: Under the conditions, $90 oil and $8 corn, the market would not produce that ethanol.

CHARLES: It's not the market that's driving ethanol production at the moment, it's the law. A law called the Renewable Fuel Standard. It requires gasoline companies to buy a certain amount of ethanol. This year, they have to buy 13.2 billion gallons. Next year, that number is supposed to go up to 13.8 billion.

TYNER: With the renewable fuel standard, you have a quasi-fixed demand, regardless of what the corn price is.

CHARLES: And Tyner says because of the drought and the plight of some farmers, the country may be heading into a political battle over this law. The political battle is just like the bidding war over corn. On one side, there are people like our hog farmer, Mark Legan. They see the ethanol mandate, as it's called, swallowing up corn supplies that they desperately need to stay in business.

LEGAN: You know, I'm not opposed to being able to compete for corn, just like they do. But, you know, when they have a government mandate, that they have to be able to produce 14 or 15 billion gallons of ethanol no matter what, then that really is not fair.

CHARLES: One the other side, there are the companies that spent a lot of money building ethanol plants because of this law. David Brooks is general manager of the Cloverdale plant which is owned by the biggest company in the ethanol industry, POET.

DAVID BROOKS: Ethanol creates a lot of good things for this country; creates jobs here at home, keeps our dollars here instead of going overseas for foreign oil. And I just would hate to see us backtrack from the direction we've been going.

CHARLES: A whole coalition of meat producers has started a campaign to roll back the ethanol mandate. They don't want to get rid of it entirely, just set up a formula that reduces required ethanol production when corn is in short supply.

Wallace Tyner, at Purdue University, says the fight isn't really over ethanol production this year; the companies are well on their way to meeting this year's requirement already. The battle is over next year.

Now, the Environmental Protection Agency could reduce the ethanol mandate or waive it.

TYNER: The law says that EPA can issue a waiver if there is, quote, "economic harm," unquote.

CHARLES: The problem with that language, Tyner says, is that there will be economic harm to someone no matter what the agency does. The drought made sure of that.

TYNER: You cannot make the harm go away. All you can do is decide who has to take it.

CHARLES: The EPA is expected to announce its decision in November. Dan Charles, NPR News. Transcript provided by NPR, Copyright National Public Radio.